Banking crisis in simple terms: "Lets say the banks are pot dealers"

[e-brake]

I got this from the fark.com message board, this comment really hit the nail on the head so I thought I would post it up here:



It's called a credit crisis because most people don't realize how desperate we are.

I like to think of it this way: Lets say a bank is a pot dealer. This dealer has been a nice guy in the past, fronting OZ's, eighths, and grams because his customers are good customers. They keep coming back for more. The dealer usually thinks something along the lines of, "GREAT! More money!"

Recently, however, the dealer keeps fronting more and more pot, and not seeing any return. His customers smoke all their weed and never pay the dealer back or offer any kind of collateral (like an Xbox or a t.v.). Now the dealer is getting calls from his grower who says, "I need to pay my rent, where's the money?"

"Well I don't have it, I've been fronting to most of my customers." replies the dealer.
"Well it's time to go collect, or it's YOUR ass!" responds the grower with anger in his voice.

So the dealer starts collecting on his debts. Those who can't pay get an Xbox, a nice watch or a t.v. stolen. "Not Fair!" say the customers! "That was mine and you took it!"
"You should've payed your debt," replies the dealer, "And now I have to pawn this stuff to pay off my grower. You should've payed me the money you owe me!"

This go's on and on for a few weeks, and eventually the dealer makes some of his money back from his customers, but he still has all this money he's still owed and his customers don't have anything left for him to pawn.

So a new guy, we'll call him John Smith, moves in town. He seems cool enough, his car is hooked up, he has a really nice apartment. He comes to the dealer and says, "Let me buy an OZ. I'll give you half now and the rest later today after I cash my paycheck." The dealer refuses and says, "No, I need the cash now, or no deal."
John Smith gets pissed, "Why not? I'm good for it."

"I can't front anything anymore," says the dealer. "I don't have enough to cover me if you can't pay, no matter what. I just can't really risk fronting to anyone anymore because I'm so broke that I can barely pay my rent. I might get kicked out of my apartment soon because I can't pay my bills and my grower still wants the money I owe him or he'll take all of my stuff!"

Now the dealer can risk going to his parents and asking for money, which they have a lot of, but they'll want the money back as soon as possible, and bitch every chance they get. What's more, the dealer might get in serious trouble with his parents if they find out why he has no money.

Panicking, he begrudgingly asks his parents for money, "I'll explain later, but my bills are due by the end of the day or my power gets cut off and my landlord kicks me out."
"That's ok," his parents say, "we'll cover your debts...again...but you have to move back in with us until you can learn some fiscal responsibility!"

[djetaine]

Lol, well put

[St. Stalin the Apathetic]

Except that weed is not real estate - weed turns to ashes after you smoke it.

The homes, they still exist and still have value. The pile of ashes doesn't.

You see the difference there

[matias]

homes turn to ashes too - it's called oak cliff kekek

[zymote]

Originally Posted by St. Stalin the Apathetic

Except that weed is not real estate - weed turns to ashes after you smoke it.

The homes, they still exist and still have value. The pile of ashes doesn't.

You see the difference there

I don't know Xian - in some markets "going up in smoke" is a pretty apt description for what property values are doing. If your home is worth significantly less than what you owe on it, a negative number is worse than zero.

[St. Stalin the Apathetic]

Originally Posted by zymote

I don't know Xian - in some markets "going up in smoke" is a pretty apt description for what property values are doing. If your home is worth significantly less than what you owe on it, a negative number is worse than zero.

In a word.... no.

Presuming the home is worth less now than when purchased it is still worth more than nothing - which is what you're suggesting.

Don't confuse the value of the asset backing the note with the borrower's balance sheet.

Lastly, let's say the home does burn to the ground..... there is still land underneath that pile of ashes that is worth money.

So, the anology is very faulty from every angle. Funny - but faulty.

[black_ostrich]

true.. everybody and the USA has been high on credit for years. people kept getting credit cards,houses, and cars,.... now China, Germany, U.K, Australia, Japan, Africa the rest of theworld wants to collect.

This is why they want $700 billion dollars. To give to the world banks...what a complete failure of fiscal spending.

It's finnally happened we are a world economy, Seems like global socialism to me.

Free the market- Free us from debt!!!!!

[St. Stalin the Apathetic]

d'oh!

[Hubb]

my property value has gone in the shitter and i have lakefront property

[DJ Uhm]

Originally Posted by St. Stalin the Apathetic

In a word.... no.

Presuming the home is worth less now than when purchased it is still worth more than nothing - which is what you're suggesting.

Don't confuse the value of the asset backing the note with the borrower's balance sheet.

Lastly, let's say the home does burn to the ground..... there is still land underneath that pile of ashes that is worth money.

So, the anology is very faulty from every angle. Funny - but faulty.

Do you not see where you are still wrong though Christian. The home is still worth less than what you paid for it, and so in essence you are looking at negative dollars. It doesn't matter if you could still get something for selling it since that money still has to go to paying the principal anyways. What are you going to do roll it over into another mortgage? I don't even know if you can do that like you can with a car, but regardless the credit cycle starts all over again. There's so much more to get into with this, but I just don't have the time.

[NoKegger4U]

Originally Posted by DJ Uhm

Do you not see where you are still wrong though Christian. The home is still worth less than what you paid for it, and so in essence you are looking at negative dollars.

Weed cost $60 and you smoke it all you have $0 and is worth 0% of cost.

House cost 200k and is worth 150k. You still haz 150k, or 75% of cost.

75% > 0%

[St. Stalin the Apathetic]

Originally Posted by DJ Uhm

Do you not see where you are still wrong though Christian. The home is still worth less than what you paid for it, and so in essence you are looking at negative dollars.

Brian, you're missing the point. Just because the home owner is upside down doesn't mean that the security interest in the home is zero. The home itself as well as the land under it have value. You are confusing the balance shhet of the borrower with the intrinsic value of the property. They are different things.

Originally Posted by DJ Uhm

It doesn't matter if you could still get something for selling it since that money still has to go to paying the principal anyways. What are you going to do roll it over into another mortgage? I don't even know if you can do that like you can with a car, but regardless the credit cycle starts all over again. There's so much more to get into with this, but I just don't have the time.

Another mortgage? For what purpose?

Unless the borrower has an ARM the mortgage payments aren't going up Brian. (If they do have an ARM and cannot afford it they are victims to thier own bad decision making.) So what do you do? Keep paying the note and hope property values recover. Markets are not one way streets some times property values go up and sometimes down. In the long term its pretty reliable that they'll go up.... in the short term that not as reliable.

[black_ostrich]

i'm happy with my investment!!

my house of 1 yr and 6 mos has repapraised for $12,000 more than paid for in the bishop arts area. We are negotiating to a re-fi deal as i type. (rates are low)

We have not done one thing to fix up my house either......It seems that the downtown area or close to it has become good investments -living out in the burbs is costly at this time becasue of gas, i sappose.

Texas has good investments right now compaired other parts of the nation. The housing bubble didn't really affect Texas.

[DJ Uhm]

Originally Posted by MicahB

Weed cost $60 and you smoke it all you have $0 and is worth 0% of cost.

House cost 200k and is worth 150k. You still haz 150k, or 75% of cost.

75% > 0%

I was getting away from the amuzing analogy that falls short of explaining th issue. The fact of the matter is you are left with less than what you had initially signed up for. You have already spent thousands of dollars on the home just getting into it. Not taking into account any of the other $$ that you possibly spent renovating. Then to have the value that it once was drop preciptiously lower, because of things outside of your control, makes the sting that much worse. Yes, you do still have some value to this piece of property, but that means nothing when trying to sell it and what you recoup doesn't match the principal of the loan. Much less the extra money that you have already put into it.

[DJ Uhm]

Originally Posted by St. Stalin the Apathetic

Brian, you're missing the point. Just because the home owner is upside down doesn't mean that the security interest in the home is zero. The home itself as well as the land under it have value. You are confusing the balance shhet of the borrower with the intrinsic value of the property. They are different things.



Another mortgage? For what purpose?

Unless the borrower has an ARM the mortgage payments aren't going up Brian. (If they do have an ARM and cannot afford it they are victims to thier own bad decision making.) So what do you do? Keep paying the note and hope property values recover. Markets are not one way streets some times property values go up and sometimes down. In the long term its pretty reliable that they'll go up.... in the short term that not as reliable.

Selling the house and moving.....duh!